Q10 - University of Houston-Victoria FIN 6352 Financial...

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FIN 6352 Financial Management FMQuiz10 Dr. Xavier Garza Gómez University of Houston-Victoria FIN 6352 Financial Management Review Quiz for Chapter 10- The Cost of Capital True-False 1. The cost of equity capital from the sale of new common stock (r e ) is generally equal to the cost of equity capital from retention of earnings (r s ), divided by one minus the flota- tion cost as a percentage of sales price (1 - F). a. True b. False 2. The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock which has no flotation cost and retained earnings whose cost is the average return on assets. a. True b. False 3. If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, r s , than on the interest rate on long-term debt, r d , for most firms. In other words, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt. a. True b. False Multiple Choice: Concepts 4. Which of the following statements is most correct? a. Although some methods of estimating the cost of equity capital encounter severe dif- ficulties, the CAPM is a simple and reliable model that provides great accuracy and consistency in estimating the cost of equity capital. b. The DCF model is preferred over other models to estimate the cost of equity because of the ease with which a firm's growth rate is obtained. c. The bond-yield-plus-risk-premium approach to estimating the cost of equity is not always accurate but its advantages are that it is a standardized and objective model. d. Depreciation-generated funds are an additional source of capital and, in fact, represent the largest single source of funds for some firms. e. None of the statements above is correct.
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FIN 6352 Financial Management FMQuiz10 Dr. Xavier Garza Gómez 5. A company has a capital structure which consists of 50 percent debt and 50 percent equi- ty. Which of the following statements is most correct? a.
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Q10 - University of Houston-Victoria FIN 6352 Financial...

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